Future credit crises can be averted with a relatively simple restriction on real estate lending, according to the Federal Reserve Bank of Dallas.
"A simple, effective reform would involve restricting a loan's amount to no more than a specified percentage of the underlying real estate's appraised value," Jeffery Gunther, an assistant vice president with the Dallas Fed, wrote in a report published last week. Doing this "would create a cushion of borrower equity," which would be "available to lenders in the event of default."
He said that regulating the loan-to-value ratio would make it more likely that borrowers would take on loans they can repay.
However, the Fed does not have the authority to make such a change; that would be up to regulators, who have shown an increasing appetite for imposing new lending rules.